http://www.bloomberg.com/news/2011-...urs-rally-expands-credit-as-program-ends.html
Ben S. Bernankeâs $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.
The Standard & Poorâs 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.
âLooking at market indicators, you have to be convinced itâs been a success,â said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. âWhen you get into periods of aggressive central bank easing, and weâre clearly in the most aggressive period of easing that weâve ever seen, the markets tend to lead the real economy.â
The Fed said last month it wonât need to extend the $600 billion buying program beyond its scheduled end next month. Payrolls expanded by 244,000 in April, the biggest gain since May 2010, after a revised 221,000 increase the prior month, the Labor Department said May 6. The jobless rate climbed to 9 percent, the first increase since November, a separate survey of households showed.
âStopped the Hemorrhagingâ
âWe are starting to see the impact, albeit slowly,â said Jim Sarni, managing principal in Los Angeles at Payden & Rygel, which oversees more than $55 billion in fixed-income assets. âThe unemployment rate has slowly started to come down. We have a long way to go, but at least it stopped the hemorrhaging.â
Bernankeâs quantitative easing program, dubbed QE2 by analysts and investors because it followed an earlier round of $1.7 trillion in bond purchases in 2009 and the first quarter of 2010, was criticized by officials around the world.
Chinese Premier Wen Jiabao said that the policy would foster financial instability and asset bubbles. Six days after the Fed suggested at its Sept. 21 meeting that it was ready to start buying Treasuries, Brazilian Finance Minister Guido Mantega said governments were engaging in a âcurrency war.â German Finance Minister Wolfgang Schaeuble called the asset- purchase program âcluelessâ on Nov. 5 and suggested it was designed to erode the value of the U.S. dollar.
Fighting Deflation
Back in November, the biggest concern for the Fed was preventing a general decline in prices, which can paralyze an economy by hindering investment, as the jobless rate held at 9.5 percent or higher for 14 months. Core consumer prices rose 0.6 percent in October from a year earlier, the smallest gain since records began in 1958, government data at the time showed.
âMeasures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandateâ of promoting full employment and containing consumer prices gains, the central bankâs Federal Open Market Committee said in a Nov. 3 statement.
Since reaching a 20-month low of 2.18 percent in August, a bond market measure of inflation expectations the Fed uses to help determine monetary policy has risen to 2.87 percent. The five-year forward breakeven rate projects what consumer price increases may be beginning in 2016, smoothing blips in inflation expectations from swings in oil prices and other temporary events.
Controlling Inflation
The gauge is down from 3.28 percent in December even with energy and food costs reaching record highs in a sign that investors expect Bernanke will be able to withdraw the unprecedented stimulus before inflation gets out of hand. The current level compares with the average of 2.71 percent in the five years before credit markets seized up in 2008. The core inflation rate has increased to 1.2 percent.
âWeâve seen a bit of a lift in breakeven inflation rates, but itâs not dramatic,â Tank of Neuberger Berman said.
The Fedâs policy of pumping cash into the financial markets risks longer term damage, according to Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $85 billion. He compared the Fedâs current policy to the one it adopted following recession of 2001-2002, when policy makers slashed its target rate to 1 percent in 2003 to spark the housing market and the economy.
âIt was a failure,â Bittles said. âI donât think itâs very healthy to artificially boost stock prices. What are the long-term consequences of that? We donât know. The Fed did this with housing back in the last decade, and the unintended consequences were a disaster.â
Dollar Depreciation
QE2 has contributed to an 11.9 percent decline since August in the dollar based on Bloomberg Correlation-Weighted Indexes, which measure its performance against nine of the most-traded currencies in the world, including the euro, yen and pound.
Gold and silver reached records in April as investors sought to hedge financial assets against the weakening dollar and accelerating inflation. Gold advanced 25.8 percent in the past year, while silver more than doubled as investors increased their holdings in exchange-traded products to a record 15,518 metric tons on April 26.
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Ben S. Bernankeâs $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.
The Standard & Poorâs 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.
âLooking at market indicators, you have to be convinced itâs been a success,â said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. âWhen you get into periods of aggressive central bank easing, and weâre clearly in the most aggressive period of easing that weâve ever seen, the markets tend to lead the real economy.â
The Fed said last month it wonât need to extend the $600 billion buying program beyond its scheduled end next month. Payrolls expanded by 244,000 in April, the biggest gain since May 2010, after a revised 221,000 increase the prior month, the Labor Department said May 6. The jobless rate climbed to 9 percent, the first increase since November, a separate survey of households showed.
âStopped the Hemorrhagingâ
âWe are starting to see the impact, albeit slowly,â said Jim Sarni, managing principal in Los Angeles at Payden & Rygel, which oversees more than $55 billion in fixed-income assets. âThe unemployment rate has slowly started to come down. We have a long way to go, but at least it stopped the hemorrhaging.â
Bernankeâs quantitative easing program, dubbed QE2 by analysts and investors because it followed an earlier round of $1.7 trillion in bond purchases in 2009 and the first quarter of 2010, was criticized by officials around the world.
Chinese Premier Wen Jiabao said that the policy would foster financial instability and asset bubbles. Six days after the Fed suggested at its Sept. 21 meeting that it was ready to start buying Treasuries, Brazilian Finance Minister Guido Mantega said governments were engaging in a âcurrency war.â German Finance Minister Wolfgang Schaeuble called the asset- purchase program âcluelessâ on Nov. 5 and suggested it was designed to erode the value of the U.S. dollar.
Fighting Deflation
Back in November, the biggest concern for the Fed was preventing a general decline in prices, which can paralyze an economy by hindering investment, as the jobless rate held at 9.5 percent or higher for 14 months. Core consumer prices rose 0.6 percent in October from a year earlier, the smallest gain since records began in 1958, government data at the time showed.
âMeasures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandateâ of promoting full employment and containing consumer prices gains, the central bankâs Federal Open Market Committee said in a Nov. 3 statement.
Since reaching a 20-month low of 2.18 percent in August, a bond market measure of inflation expectations the Fed uses to help determine monetary policy has risen to 2.87 percent. The five-year forward breakeven rate projects what consumer price increases may be beginning in 2016, smoothing blips in inflation expectations from swings in oil prices and other temporary events.
Controlling Inflation
The gauge is down from 3.28 percent in December even with energy and food costs reaching record highs in a sign that investors expect Bernanke will be able to withdraw the unprecedented stimulus before inflation gets out of hand. The current level compares with the average of 2.71 percent in the five years before credit markets seized up in 2008. The core inflation rate has increased to 1.2 percent.
âWeâve seen a bit of a lift in breakeven inflation rates, but itâs not dramatic,â Tank of Neuberger Berman said.
The Fedâs policy of pumping cash into the financial markets risks longer term damage, according to Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $85 billion. He compared the Fedâs current policy to the one it adopted following recession of 2001-2002, when policy makers slashed its target rate to 1 percent in 2003 to spark the housing market and the economy.
âIt was a failure,â Bittles said. âI donât think itâs very healthy to artificially boost stock prices. What are the long-term consequences of that? We donât know. The Fed did this with housing back in the last decade, and the unintended consequences were a disaster.â
Dollar Depreciation
QE2 has contributed to an 11.9 percent decline since August in the dollar based on Bloomberg Correlation-Weighted Indexes, which measure its performance against nine of the most-traded currencies in the world, including the euro, yen and pound.
Gold and silver reached records in April as investors sought to hedge financial assets against the weakening dollar and accelerating inflation. Gold advanced 25.8 percent in the past year, while silver more than doubled as investors increased their holdings in exchange-traded products to a record 15,518 metric tons on April 26.
(cont)...
